Three of Goldman Sachs' favourite ASX small caps

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

• S&P 500 - 4,067 (+1.53%)
• NASDAQ - 12,112 (+2.11%)
• CBOE VIX - 22.79
• US 10YR - 3.321%
• USD INDEX - 108.97
• FTSE 100 - 7,351 (+1.23%)
• STOXX 600 - 420.37 (+1.52%)
• UK 10YR - 3.095%
• GOLD - US$1,728/oz
• WTI CRUDE - US$86.10/bbl
• DALIAN IRON ORE - US$100.21/T

THE CALENDAR

A quiet one today with UK GDP on tap. It'll be interesting to see if the UK records another month of negative economic growth, thus creating the technical recession which it has come close to several times this year alone.

Tuesday is a much larger day with NAB business confidence and US CPI all on the docket. Both data points will be covered in Wednesday's report. 

THE CHART

If you think US inflation is about to come down and gift the Federal Reserve a big present in its quest for a soft landing, you have to appreciate this chart from Morgan Stanley. Sharply lower energy prices will move sequential headline inflation into negative territory. Core inflation should also remain relatively soft as core goods prices decelerate. That's the good news. The bad news is that rent inflation is likely to remain strongly elevated for some time, keeping the Fed on a steep tightening path. And that is what's keeping the Federal Reserve from pausing, at least for now. 

THE QUOTE

[Central banks] can only operate on the demand curve. This leaves them with unpalatable choices. If they accommodate the shock and support growth, they’re left with high and potentially rising inflation. If they seek to extinguish the shock and fight inflation, the economy could enter a recession.

Citi's Nathan Sheets has an even more unpleasant view of the state of global economics. Sheets argues that the chances of a global stagflationary period are rising. While it will, in their view, most likely look like the late 1970s and early 1980s, they do admit there is a small possibility of that scenario being "transitory". 

I wonder where we've heard that term before. 

STOCKS TO WATCH

It's an ASX small and mid-caps special! Brought to you by Goldman Sachs' ASX team, led by Sophie Carran. Their note looked at the best small and emerging companies on the ASX which are positioned for FY23 and beyond. Given the bearish overtones set by their economics teams, it is perhaps unsurprising that this is their focus:

We prefer structural growth opportunities and companies with strong market positioning in a weaker economic environment.

And how will companies be differentiated in this weaker economic environment? Profit margins to start. At this point, stable is good enough - and that's what Goldmans is factoring in its buy, hold, and sell calls.

With this spirit, three companies are buy-rated: Temple and Webster (ASX: TPW), Adairs (ASX: ADH), and Hipages (ASX: HPG). Of those three, TPW is their top conviction pick - arguing a prudent approach and a focus on profitability is the best way to go about these uncertain times. The hold ratings belong to Blackmores (ASX: BKL), Redbubble (ASX: RBL), and The Reject Shop (ASX: TRS). And the only sell belongs to A2 Milk (ASX: A2M).    

THE TWEET

Today's report was written by Hans Lee.